Question

Multiple regression was used to explain stock returns using the following variables:

• Dependent variable:

RET = annual stock returns (%)

• Independent variables:

MKT = market capitalization (per million $)

IND = industry quartile ranking (IND = 4 is the highest ranking)

FORT = Fortune 500 firm, where FORT = 1 if the stock is that of a Fortune 500

firm, and FORT = 0 if not a Fortune 500 stock.

The regression results are presented in the table below:

	Coefficient	Std Error	t-statistic	P-Value
Intercept	0.5220	1.2100	0.430	0.681
Market capitalization	0.0460	0.0150	3.090	0.021
Industry Ranking	0.7102	0.2725	2.610	0.040
Fortune 500	0.900	0.5281	1.700	0.139

(b) What is the closest value to the expected amount of the stock return attributable to it

being a Fortune 500 stock? Justify your answer.  (5)

Answer 1

b) The %age of annual return on the stock attributable to being a fortune 500 stock is the coefficient of the dummy variable, Fortune 500. The coefficient is shown in the regression table, which is 0.900.

Regression equation: AR (%) = 0.5220 + 0.0460*MC + 0.7102*IR + 0.9*Fortune500

If Fortune 500 = 0 and 1, the difference in Annual return is the coefficient = 0.9

Hence, we can say that the effect of a stock being a fortune 500 stock increases the annual return by 0.9% on an average.